Bettin’ On The Wrong Horse

by BILL WADDELL

The most important thing in life is not what you did in the past but what you do next.  That is particularly important if you happen to be Bill Simon – the CEO of Walmart.  According to him inflation is "going to be serious. We're seeing cost increases starting to come through at a pretty rapid rate."  The business press and those who either cannot or will not see the fundamental flaw in their theories blame it on some vague economic theory that mysteriously causes inflation to occur (wasn't is just a few months ago that those same theorists had their underwear in a knot over looming deflation?).  They blame cotton prices, oil and raw materials.  Bill Simon knows better, however.  He knows Walmart bet on the wrong horse and now they need to make a fundamental change in the plan – and I'll bet he doesn't know what the next best move is.

He bet on that pretty red horse – the Chinese one.  And he knows the US economy is not facing a deflation problem – China's is.  And Walmart is all in with China. "As wages and production costs rise, coastal factories are demanding higher prices for the goods they ship overseas. That means Americans, Europeans and other buyers will have to pay more for those goods or seek lower-cost suppliers elsewhere."  According to a guy named Tao who works for a Hong Kong bank, "I hear that many Chinese exporters are rejecting orders from Wal-Mart and other Western retailers.  I’ve been covering the Chinese economy for a long time, and I’ve never heard that before."

It isn't cotton and gas prices that have Mr. Simon fretting – it's that "many Chinese exporters are rejecting orders from Walmart" part.  That coupled with knowing that NAPA CFO Jerry Nix is right when he says "customers are 'pushing back' on price increases."

So the China 'miracle' is coming unglued, as we have been predicting for a long time on Evolving Excellence.  What is poor Bill to do?

He could take the ostrich approach – hope against logic that this is just an anomaly – that somehow things will be OK and Walmart's China-centric model will come through this intact … or just maybe if he plays the ostrich, perhaps all the competition will too – so everyone can raise prices together and force the US consumers to accept the cost of their bet on China.

He might bail out of China and continue the pursuit of cheap labor – take the whole Walmart show down to Ho Chi Minh City, the next stop of choice for the 'business by numbers' crowd.  Things don't look a whole lot more promising there, however.

Or Mr Simon could finally figure out that an entirely different supply model is emerging – one based on lean thinking and based on a holistic view of costs, and one that understands the importance of time in the big economic picture.  He could overhaul the Walmart sourcing strategy and pull it back to a regional focus – some combination of Mexico and the USA to support North American Walmart needs.  That would be the wise choice … but we have yet to see if he is a wise leader.

Should be interesting to watch the thinking unfold at the world's largest retailer – at least the largest for now.